Factor Rates vs. APR: How to Calculate the True Cost of an MCA

For most small business owners, "interest rates" are a familiar language. You see an APR (Annual Percentage Rate) on your credit card statement or your mortgage, and you know exactly what it means over the course of a year.

But when you apply for a Merchant Cash Advance (MCA), the language changes. Suddenly, you aren't looking at a percentage; you’re looking at a Factor Rate.

If you’ve ever felt like you were comparing apples to oranges when looking at an MCA offer versus a bank loan, you aren’t alone. Today, we’re breaking down the math so you can calculate the true cost of your capital.

What is a Factor Rate?

Unlike a traditional loan where interest "accrues" (grows) over time on your remaining balance, a factor rate is a fixed multiplier. It is expressed as a decimal, typically ranging from 1.1 to 1.5.

The math is simple:

Advance Amount×Factor Rate=Total Repayment

Example: You receive a $50,000 advance at a 1.3 factor rate.

$50,000×1.3=$65,000

Your total cost of capital is a flat $15,000.

The Key Difference: Time is the Variable

The biggest trap business owners fall into is assuming a 1.3 factor rate is the same as 30% interest. It isn't.

With a traditional loan, if you pay it off early, you save on interest. With an MCA, the total payback amount is fixed. Whether you pay it back in four months or twelve, you still owe that $15,000 fee. This is why the APR of an MCA can look much higher than the factor rate suggests.

How to Calculate Your "Effective APR"

To compare an MCA to a traditional bank loan, you need to "annualize" the cost. Since MCAs are usually paid back in under a year, the APR is often higher because the "speed" of repayment is faster.

The 4-Step Conversion Formula:

1. Find the Total Fee: (Advance × Factor Rate) - Advance.
2. Find the Percentage Cost: (Total Fee / Advance).
3. Annualize the Rate: Multiply the percentage by 365.
4. Divide by the Term: Divide that number by the estimated days to repay.

Example: A $10,000 advance, 1.3 factor rate, 180-day (6 month) repayment.

• Fee: $3,000
• Percentage: 30% ($3,000 / $10,000)
• Annualized: 0.30×365=109.5
• Effective APR: 109.5/180=60.8%

Why Do Businesses Choose Factor Rates?

If the APR is higher, why not just go to a bank? For many of our clients at Gold Chair Capital, the answer is ROI and Speed.

• No Collateral: Most MCAs are unsecured.
• Approval Speed: You can get funded in 24 hours, whereas a bank "10% APR" loan might take 6 weeks to approve.
• Flexible Payments: Because MCAs are a purchase of future sales, your payments often shrink during slow months.

The Bottom Line

An MCA is a high-octane tool. If you use a $50,000 advance to buy inventory that generates $100,000 in profit over six months, the $15,000 fee is a small price to pay for that growth.

Before you sign, always ask: "What is the total dollar cost of this capital, and can my margins support it?"

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